SERBIAN CIVIL AVIATION, NOT MAKING HEADWAY

UNCLAS SECTION 01 OF 02 BELGRADE 000488 SENSITIVE SIPDIS USDOC FOR 4232/ITA/MAC/EUR/OEERIS/SSAVICH E.O. 12958: N/A TAGS: ECON EAIR EINV SR MW SUBJECT: SERBIAN CIVIL AVIATION, NOT MAKING HEADWAY REF: STATE 33342 SUMMARY -------------- ¶1. As the rest of the world moves to liberalize the aviation market, Serbia's aviation industry remains at a standstill with key civil aviation legislation stalled and privatization plans grounded. A lack of political will, extended breakdowns of the government, and the fallout over Kosovo independence continue to, and will for some time, hinder progress on a U.S.-Serbian Open Skies agreement. End Summary. U.S. - SERBIAN OPEN SKIES NOT ON THE HORIZON -------------- ¶2. While the U.S. and EU celebrate concluding an Open Skies (OP) agreement, the prospect of a U.S.-Serbia agreement is distant on the horizon. Even before the recent round of political instability and cooling of diplomatic relations, the GOS had been reluctant to move forward on measures needed to re-establish direct flights between the United States and Serbia, which had been suspended in the 1990's because of sanctions against the Milosevic regime. The present day reality for direct flights to resume is that the GOS must pass and implement civil aviation legislation to upgrade the country from Category 2 to Category 1 safety standards. Serbia responded to the FAA's 2003 recommendation for new aviation oversight legislation that would give independent authority and power to the CAD with a draft Law on Civil Aviation. The draft, however, has yet to move to parliament for approval. Weak political will and pride are to blame. In a meeting with Econoff on January 22, 2008, the CAD Director Milan Mokovic argued that he had the recommended level of authority as evidenced by JAA's (the European equivalent of the FAA) laudatory feedback on Serbia's progress on meeting JAA standards. Although Mokovic made it clear he did not see why Serbia needed to jump through FAA hoops to achieve a Category 1 rating, he was confident the draft law would go to and be passed by parliament, eventually. Without this legislation, even U.S. carrier code sharing with Serbian carriers is not possible. Since the government most recently dissolved in February of this year, the aviation law is one of many stalled pieces of legislation. ¶3. A more contentious barrier to an OP agreement is the status of Kosovo. Before the independence of Kosovo, Belgrade objected to OP language that stipulated Serbian territory be defined in accordance with applicable UNSC resolutions. Fearing future UNSC resolutions would redefine its borders; the GOS would not sign the proposed OP agreement. The U.S.-Yugoslavia bilateral aviation agreement of 1978 is applicable to Serbia. However, not even this bilateral agreement can be resurrected and put into force without the civil aviation law. JAT PRIVATIZATION ALSO GROUNDED -------------- ¶4. Legislation and an OP agreement are not the only aviation-related issues awaiting the formation of a new government following the May 11 parliamentary elections. The privatization of flag carrier Yugoslav Airlines (JAT) has also been grounded. Under the advisory of American Rothschild Consulting Group, a tender for JAT was to be offered in mid April 2008. It is now scheduled for an undetermined date after the May 11 elections. Miroslava Blazic, Vice President of Citadel Financial Advisory (the contracting consulting firm working on the JAT deal locally for Rothschild),in a conversation with Econoff on April 23 said the political situation is to blame for the lack of progress on JAT's privatization. The government has not made key decisions on the structure of the JAT or passed legislation that would allow for the company to be sold. According to Blazic, Citadel can not provide potential investors with key information on the potential structure of the deal or a when the company will be up BELGRADE 00000488 002 OF 002 for sale. Access to the EU markets, pending the ratification of the EU-Serbian OP agreement, is JAT's allure in spite of its current dismal state. The average age of its fleet is 20 years and it is $285 million in debt. There are an estimated 400 redundant workers. ¶5. Several airlines from around the world have expressed interest in JAT including Air India, Icelandair, Air One (Italy),Air Berlin, and the Russian carrier Aeroflot. A letter of intent between Serbia and Air India signed in January 2007 seems to have been pushed aside when Moscow and Belgrade signed a MOU of strategic partnership in June 2007. Aeroflot announced plans to bid for JAT together with an EU partner in an arrangement that would give Aeroflot a little under 50% ownership, an arrangement would circumnavigate the Serbian-EU OP clause prohibiting non-EU countries from acquiring a majority share in any EU air carrier. To date, it appears Russian-Serbia MOU has yielded no obvious cooperation between JAT and Aeroflot. SERBIAN AVIATION LEADERS SAY THEY'RE ON BOARD -------------- ¶6. On February 13, the DCM hosted a luncheon with leaders from Serbia's aviation community which included CAD Deputy Director Dragoljub Trgovcevic. Participants underscored the need and desire for direct flights from Belgrade to the United States as well as to other parts of the region with the dream of Serbia as a regional hub. According to Rade Markovic, Senior Advisor to JAT Airways, there is huge market potential for direct flights between Chicago - where half a million Serbs and Serb-Americans live - and Belgrade. Last year some 150,000 Serbs flew through Frankfurt, Dusseldorf and Amsterdam to the US. According to the Privatization Agency Director Vesna Dzinic, the Nikola Tesla International Airport in Belgrade will not be privatized. Instead 30% of its shares will be offered through an IPO in the first half of 2009. Money from the sale will go into a joint venture with a strategic partner to expand the airport and its operations to become a regional cargo hub. The American firm DynCorp withdrew from a similarly planned partnership in 2006. COMMENT -------------- ¶7. Although Serbian aviation officials say they want access to more markets and to restore JAT to its former glory, their actions suggest otherwise. Even the seemingly non-controversial aviation law has not found its way to parliament in the last two years. Serbia's airline industry must wait to see if it will be a priority in the new government. A western-leaning democratic government, in contrast to the Radicals, would be more willing to pass aviation law legislation, ratify the EU-Serbia OP agreement, and continue privatization in its quest to move toward European integration. End Comment. MUNTER